Boards: who do they work for?

By Abdul Jabbar Kasim | 10/3/2016

AS the sanctity of the board fallen into disrepute? A recent article in the Harvard
Business Review says boards are under-performing, `they aren`t working`. `They
are `failing` in `their core mission of providing strong oversight and strategic support
for a management`s efforts to create long term value. Under most jurisdictions, the
board is elected by shareholders. Similarly, corporate legislation in Pakistan requires
that a board be elected. Other members of the board represent institutions with the
`deemed director` being the CEO. Corporate code assigns the role and
responsibilities of each member. Board members, being representatives of the
shareholders, are required to discharge their fiduciary responsibility with care and
diligence. Corporate misdoings, such as that of Enron, are attributed to the
lackadaisical approach of the board. The core effort, in the case of Enron having all
independent directors (IDs) on the board, was to make the company look healthier
than it was. This attitude destroyed the company and the wealth of its shareholders.
Shareholders trust the board to discharge its function with integrity, honesty and due
care.

A study by Bartman and Wiseman underscore boards pressuring companies

to focus on short-term financial results and highlight the brighter side of the company
rather than create shareholder value with a long-term perspective. The core
responsibility of the board is to provide a vision to, and mission for, the company,
along with a long-term strategy. Literature on the subject stresses: what is good for
the shareholders is good for the company and the prime responsibility of the board
is to serve the interest of its shareholders. Since, shareholding in the company is
wide and scattered, shareholders cannot garner and exert force with the required
thrust to have a binding impact through their votes. Yet, corporate governance
activists are seen to be more visible in protecting the interests of shareholders and
are often responsible for getting the board to act prudently. Activists have an
appropriate understanding of the company and the challenges the board faces.

Ever since the publication of the Cadbury Report 1992 and the Sarbanes-
Oxley Act, 2002, there has been a special focus on the role of a board. These
enactments have greatly emphasized the roles of IDs and non-executive directors. A
consensus has emerged that these are watershed developments and would do a tonne
of good for the corporate world. Efforts have been geared to promote a legislation
that not only advocates a diversified board base, but also a robust setup that has the
energy and time to concentrate on enhancing the shareholders` value.

All listing regulations Code of Corporate Governance and Best Business

Practices provide an enabling environment for the role of a robust board. The
presence of IDs on a public company board is mandatory and a key development.
ID tests have been prescribed with the objective that their presence on the board will
make an underpinning difference with respect to protecting the rights of the
shareholders.

In Pakistan, the Code of Corporate Governance (2012) allowed two years for
listed companies to initiate a mechanism for their board`s evaluation. As a sequel,
all listed firms beginning in 2015, are required to have in place such a mechanism
with the parameters set by individual corporate constituents. The intent and thrust of
such a requirement is to let board members` review their performance in a broader
perspective, in line with international best business practices. The aim of such an
evaluation provides a platform to the board as a whole, and directors in their
individual capacity, to assess their strength and weaknesses. There appears to be a
cold-shouldering approach to this requirement.

A recent survey on compliance of code of corporate governance revealed that

listed companies have a mechanism in place. Yet, neither is willing to share the
methodology, nor willing to disclose its outcome. Those at the helm of affairs say
the financial performance is the benchmark and reflects the performance of the
board. Some directors` acumen and robust contribution may be the reason of good
financial results. However, a legitimate approach to board evaluation is an appraisal
of each director to assess individual contribution, as is the practice world-wide.

The UK Code of Corporate Governance 2012 requires that the board should
state, in its annual report to the shareholders, as to how the board evaluation has been
conducted. This includes the board committees and its individual directors.
UK`s code also provides for outside facilitation of board evaluations, so as to have
an independent evaluation of board performance etc. To improve a corporate board`s
evaluation in Pakistan seriously, in letter and spirit, the regulator, shareholders and
corporate governance activists need to exert legitimate pressure on companies to stay
on the right course.

The writer is a faculty member of loBM. jabbar.kasim@iobm.edu.pk